5th OECD Asian Roundtable on Corporate Governance: Developments In Malaysia

1
5th OECD Asian Roundtable on Corporate
GovernanceDevelopments In Malaysia The
Private-Sector Perspective

• Vincent Duhamel
• State Street Global Advisors
• March 2003

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Agenda

• Company and market valuation
• Legal, regulatory, and supervisory framework
• Shareholder rights and participation
• Role and responsibility of institutional
  investors

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Corporate Governance Structure

• Corporate governance
• a system of checks and balances designed to
  produce efficient corporations that deliver
  long-term value
• Arms length model
• depends upon checks and balances between
  management, boards, majority and minority
  shareholders and enforcement of shareholder and
  creditor rights
• Relationship model
• governance exercised by controlling
  block-holders minority shareholder rights and
  role of independent board directors are weak

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Impact on Company Valuation

• Relationship-oriented companies and markets
• lack effective risk oversight
• have ineffective mechanisms for shareholders to
  assess or influence management
• may be perceived as disregarding consequences of
  underperformance or failure of good governance
• Investors increasingly link corporate governance
  with stock valuations and cost of capital/risk
  premiums for firms and emerging markets
• companies that follow international standards for
  governance are considered worth 20 more than
  companies lacking such standards
• corporate governance weaknesses erode shareholder
  value and jeopardize investor rights
• addressing weaknesses can dramatically increase
  investor interest

5
Legal, Regulatory, and Supervisory Framework

• Prior to 1997 financial crisis, Malaysia took
  steps to strengthen corporate governance
• rules for independent directors, audit
  committees, shareholder election of directors
• Securities Industry Development Centre
  established
• Financial crisis highlighted importance of good
  corporate governance -- led to increased
  regulation
• Quarterly financial reporting adoption of
  International Accounting Standards
• New disclosures, corporate board requirements
  under Malaysian Code on Corporate Governance
• Revamped KLSE listing requirements, mandatory
  director training for listed companies
• Limits to insider trading, dealings by directors
  and substantial shareholders, voluntary
  suspension of share trading

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Malaysian Corporate Governance A Moving Target

• Many improvements are being made
• increased partnership between government and
  private sector with greater separation of
  ownership and management
• authorities pressuring boards to respect
  shareholder interests
• effective legal system and adequate legislation
  protect private property
• unique system for training directors
• . . . But problems persist
• concentrated ownership
• corporate attitudes undervalue transparency,
  accountability and integrity
• lack of division between politics and corporate
  sector
• Mind-set of shareholder passivity

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Shareholder Rights

• Best practice requires shareholder rights to
  participate in corporate strategic
  decision-making
• Malaysia has good track record protecting
  shareholder rights and complies with many best
  practice standards, e.g.
• All shareholders entitled to attend AGM and vote
  or appoint proxies
• Meeting and proxy information conveyed in timely
  manner
• Re-registration of shares into beneficial owners
  names not required
• Shares being voted are not blocked for trading
• Responsibilities of depository bank for ADR
  shares are clear
• Split voting is possible
• Issuers cannot reject votes if full compliance
  with voting requirements

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Shareholder Participation

• Level of participation by minority shareholders
  in corporate governance remains relatively low
• Corporate governance historically dominated by
  majority investors
• Changing entrenched or traditional practices is a
  slow process
• But shareholder participation beginning to grow
• foreign investors imposing demands and pressures
• local investors considering how they can exercise
  their rights
• large institutional investors realize they can
  wield substantial influence
• Organizations like the Malaysian Institute of
  Corporate Governance contributing to training and
  education
• Minority Shareholder Watchdog Group Badan
  Pengawas working to unite minority shareholders
  and raise governance standards

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Role and Responsibility of Institutional Investors

• Institutional shareholders have right and duty to
  exercise influence on company value
• Investment managers must uphold duty of care and
  loyalty to beneficial owners to add value and
  protect interests
• SSgAs corporate governance philosophy and
  process
• sacred trust to ensure that clients receive
  best possible return on investments within
  acceptable level of risk
• vote proxies in best economic interest of the
  owners, always considering cost-benefit
  trade-offs
• set and follow proxy voting principles and
  procedures
• maintain open door policy to encourage
  discussion be responsive to requests from
  companies and shareholders to consider issues of
  concern
• make and act on decisions through investment
  committee, proxy voting service unit, and
  thorough decision making process

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How Investors Can Effect Change

• Shareholder activism
• Relationship investing
• Quiet diplomacy
• Proxy voting
• Engage in dialogue with government, regulators,
  stock exchanges, trade associations, and
  self-regulatory bodies
• Adopt best practice policies and standards and
  communicate them to the market

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Conclusion

• Good corporate governance
• Embraces accountability and transparency
• Enhances perceived integrity of management and
  board
• Has tangible positive effects on value of a
  companys stock
• Is an important factor for investors in
  evaluating opportunities
• Investors recognize improvements made by
  government, regulators and corporations but
  challenges remain
• Convergence in regulations, attitudes and
  pressure from institutional investors and
  shareholder groups must continue
• Strong supervision and enforcement of new
  standards essential for success
• Market state of mind must firmly recognize and
  put into practice the precepts of accountability,
  transparency and integrity

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Thank you